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Upturn in Iran may aid Khatami

By Guy Dinmore
Financial Times
August 22, 2000

With Iran's economy climbing out of recession on the back of higher world prices for oil, President Mohammad Khatami could be in the happy position of overseeing a strong upturn as he prepares to stand for re-election next year.

Expectations are running high in the country, where more than 12m people struggle below the official poverty line, that living standards will improve for the first time in years.

Appearing on state television on Monday, the Shia Muslim cleric sought to defend his economic record since his landslide victory at the polls in May 1997.

On the political front, significant change appears off the agenda after Ayatollah Ali Khamenei, Iran's supreme leader who holds the real reins of power, this month blocked the president's pro-reform majority in parliament from changing a repressive media law.

Even in the field of the economy, Mr Khatami finds his room for manoeuvre curtailed, however.

The conservative establishment has blocked parliamentary oversight of the "bonyads", conglomerates that are supposed to function as charitable institutions but control as much as 20 per cent of the economy.

Nonetheless, the president has begun to reshape his administration in an attack on "big government" and to sideline opponents of his new five-year plan that, if implemented, would move Iran away from a Soviet-style command economy.

The process began with the appointment of Mohammad Reza Aref, the former telecoms minister, as head of the newly formed Planning and Management Organisation and watchdog for the reform programme. On Sunday, parliament approved a bill to streamline government by merging four ministries into two.

Attention, however, has focused on the rivalry between the two main figures in the day-to-day running of the economy Mohsen Nourbaksh, governor of the Central Bank of Iran (CBI), and Hossein Namazi, minister of economy and finance.

Economists say that if Mr Khatami wants to send a decisive signal, then one of them should go.

The US-educated CBI governor is the clear favourite among foreign investors and bankers for his efforts to secure stronger monetary powers and introduce private banking for the first time since the 1979 Islamic revolution. He has resisted the government's deficit spending and aims to stabilise the rial at its current rate of about 8,200 to the dollar, as well as abolishing a multi-tiered exchange rate system that benefits profiteers.

In a recent interview with the FT, Mr Nourbaksh was confident he would keep his job, arguing that Iran's external finances were in the healthiest state for years. He admitted there were differences of views in the administration.

Just how Iran's economy is faring is open to statistical argument. Some officials have conceded that Iran went into recession in 1998 and grew by just over 2 per cent last year.

Some evidence suggests the non-oil economy is regressing but Mr Nourbaksh denied this. Exports from April to June fell by more than 20 per cent, although this was partly due to exporters waiting for new, more liberal regulations on remittances.

With world oil prices running at nearly three times the level of a year ago, Iran's economy could be set for a strong upswing, some analysts believe.

The rial has stabilised and inflation, Mr Nourbaksh said, has dipped to an annual 12.9 per cent from more than 20 per cent last year. For the first time in over a decade, Iran's foreign exchange reserves are roughly equal to its moderate debt burden of $10.3bn. A year ago, Moody's assigned Iran a B-2 credit rating, putting it on a par with Venezuela and Honduras.

Key points of the five-year plan include: making government smaller and more accountable, privatisation, mergers and liquidations of state-run companies, and an end to state monopolies of tobacco, tea, sugar, banking and insurance. But hefty subsidies remain.

Mr Nourbaksh said a key plank was establishment of a "stabilisation fund" for above-budget oil revenues to be used only to help the private sector and exports. The plan projects an average oil price of $14.50 a barrel. At current prices of close to $30 for Iranian crude, nearly $30m is accruing each day.

"The development plan has very good instruments to give more equilibrium to the economy, and to make more room for the private sector to play an active role," the CBI governor commented.

Mr Namazi, educated in Austria and finance minister since 1997, has a reputation of being on the left with strong views on social justice. He is opposed to relaxing restrictions on imports of foreign goods, especially cars, and favours restrictive labour laws which discriminate against employers. His deputy minister in charge of taxation, Ali Akbar Arabmazar, is the bane of foreign investors.

Farshad Momeni, professor of economics at Allameh Tabatabaei University, rejects the labels of "reformist" and "conservative" often applied by media to the two rivals.

For him, the preferred labels are the "shock therapists", led by the CBI governor, and " new institutionalists", fronted by the finance minister and the commerce minister, Hossein Shariatmadari.

Unemployment, officially around 14 per cent but probably higher, is Iran's most serious social pr oblem. With 50 per cent of the population under 20, Iran needs to create 800,000 jobs a year.

The conservatives, heavily defeated in February's parliamentary elections, see the economy as the way to undermine support for Mr Khatami in the election run-up. But no serious challenger has emerged so far.

Diplomats suggest the president will be more worried about containing social unrest rather than winning next year's elections. Riots in Abadan over drinking water that might have left several people dead last month, and protests in Tehran soon after, the worst in the capital for a year, point to simmering discontent.

On television on Monday, Mr Khatami admitted his recovery plan had experienced "some failures and successes".


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